Secured debt is debt that is secured by collateral. Two types of secured debt that are most common are car loans and home loans. In the event that a borrower defaults on their loan, the lender may repossess the collateral and sell it to cover the cost of the defaulted loan. Sometimes, however, the value of the collateral is lower than the amount of the loan. In these cases, the lender may pursue additional compensation in court.
When a person files for bankruptcy, some or all of the collateral that has backed their secured loans may or may not be sold by the Trustee in charge of the case in order to make good on debts in default. While filing for a bankruptcy will place an automatic stay on the repossession of collateral, it is often very easy for a lender to request and be granted permission from the bankruptcy court to repossess the collateral to cover a debt. The property that is used as collateral, however, is often necessary for a person to maintain a certain quality of life. For example, a person who commutes an hour to work may find their financial situation worsens if their vehicle is repossessed to pay off a loan.
Keeping the property that is used as collateral is not easy, but it is possible. Anyone who wants to try to keep the property behind their loan but has fallen behind on some payments has a few options:
–Agreement with the Lender: A borrower can reach an agreement with a lender to make up any missing payments while keeping pace with their normal payments in exchange for the lender not pursuing the repossession of property. This option would be beneficial to those who depend on a piece of property in order to maintain their quality of life.
–Chapter 13 Bankruptcy: This bankruptcy is less popular than Chapter 7 for most consumers but those that want to keep their property would benefit from the entitlements of a Chapter 13 bankruptcy. Under this chapter a person may keep all of their property as long as they can stay current with the payment plan offered by the court and as long as the person agrees to make up for missed payments.
Those that are current on some loans have a few more options. They may file for Chapter 7 bankruptcy and:
–Advise the lender that they intend to surrender the property back to the lender. If the lender fails to take control of a property within a specified period of time, then the lender is assumed to have abandoned the property.
–Offer to pay a lump sum to the lender for the current fair market value of the property. This amount is often less than the original loan but will satisfy the lender because this is the amount that the lender would have most likely been able to get from the sale of the property anyway.
–Reaffirm the debt with the lender via a reaffirmation agreement. Anyone who enters into a reaffirmation agreement without the aid of an attorney will have the agreement reviewed and explained by the bankruptcy judge. This is to prevent a creditor from taking advantage or pressuring a borrower. Many bankruptcy judges will advise against this sort of agreement because a Chapter 7 bankruptcy is intended to wipe out all debts, while a re-affirmation agreement will allow a debt to be carried over to after a bankruptcy case is settled. The benefit to the borrower in addition to being able to keep their property is that they will often times be able to negotiate better terms with their lender. As long as the terms are manageable and as long as the person has a true need for the property in question, this tactic has the potential to allow a person to maintain their quality of life standard.
As you can see, anyone wanting to keep their property that is used as collateral will have to reach some kind of agreement with the lender to accept a new form of payment plan. The lender is under no obligation to approve of the plan, but many will accept some return on their investment rather than nothing at all.